Prominent VC Investor: Be Aware of ICO Pump and Dump Schemes

Jason Calacanis, a highly regarded venture capital investor who has invested in 150 successful technology startups such as Uber, Evernote, and Swell cautioned investors in the cryptocurrency sector in regards to initial coin offering (ICO) pump and dump schemes.

With several ICOs raising hundreds of millions of dollars in a span of a few days, the ICO market has overtaken venture capital funding, recording more than $3 billion in investment in 2017 alone. As such, a swarm of so-called blockchain startups have started to enter the scene, with the sole intention of operating quick cash grab pump and dump schemes through ICOs.

On services marketplaces such as Fiverr, independent advisors and ICO “experts” have started to offer white papers for less than $100, which can be then used by blockchain startups to raise tens of millions of dollars in a few hours.

Mark Karpeles, Former Mt. Gox CEO, Wants to do an ICO

Mt. Gox, the now defunct bitcoin exchange which is directly responsible for the loss of approximately $7 billion worth of bitcoins, and the man behind the company Mark Karpeles, plan to conduct an ICO to “revive” Mt. Gox. A statement released by Karpeles on his blog read:

“Launch an ICO to raise money to hypothetically revive MtGox. This sounds more challenging, both legally and because there is no guarantee of raising enough to revive MtGox. In case there is not enough raised it could still be locked to be distributed to creditors, which would be better than nothing.”

Karpeles and Mt. Gox, which have not even completed the process of paying out the creditors from Mt. Gox bankruptcy proceedings, are seeking $245 million to revive the company, which has lost nearly 1 million bitcoins due to the incompetence of its directors and executives, including Karpeles. The blog post of Karpeles laid out the following expenses that need to be covered to “revive” Mt. Gox:

  • 175 million USD to put aside as security for uncooperative creditors. Until their claims can be disputed the funds would be held by the court as security, and could be returned later
  • 20 million USD operating expenses for one year (based on MtGox last year of operating expenses of around 15 million USD to which we add extra costs such as buying new computers, servers, etc)
  • 10 million USD toward compliance in the US, which could take months to be accomplished, but would cost at least that much
  • 1 million USD toward compliance in Europe & Japan (estimated less than 6 months to be live)
  • 35 million USD as cash flow, either to allow better negotiations with financial entities and serve as emergency cash for the second year and onward
  • 4 million USD toward campaigning to creditors to actually accomplish all of this, including legal costs and others

Issues with the ICO Market

ICO is a phenomenal method of raising capital for a project that absolutely needs a native cryptocurrency or token to function. Mt. Gox is a centralized bitcoin exchange and quite evidently, it does not need a cryptocurrency launched on top of the Ethereum protocol. Karpeles wants to carry out an ICO with the sole purpose of raising $245 million, for a centralized exchange.

If leading bitcoin exchanges were to conduct ICOs to raise hundreds of millions of dollars, users and investors would likely protest against the businesses.

Mt. Gox is not in need of an ICO and a crypto-token, similar to the vast majority of projects in the ICO market. An increasing number of companies are trying to abuse the system and the hype around the ICO market to create quick cash grabs, without innovative visions and long-term strategies.